Special Surveys

Capital Structure, Capital Budgeting, and Cost of Capital

A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity.
Journal or Applied Corporate Finance Version

Dividend and Share Repurchase Decisions

Results indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956). However, fifty years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase EPS.

Earnings Management and Voluntary Disclosure

The majority of firms view earnings, especially EPS, as the key metric for an external audience, more so than cash flows. This report shows that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings.

Expected Stock Market Equity Risk Premium

This report shows direct evidence that the 10-year expected risk premium is stable and equal to about 4%. In contrast, the one-year risk premium is highly variable through time. In particular, after periods of negative returns, CFOs significantly reduce their one-year market forecasts, disagreement (volatility) increases and returns distributions are more skewed to the left.